"Just at a time when it seems CRAZY to even think about being in stocks.. You know what? Everyone feels the same".
June 27, 2016
S&P SEPT FUTURES (SPU6)
2003, 1992-4, 1971, 1953 Support
2040-2, 2071-2, 2083-5, 2100 Resistance
Equity Put/call has spiked to the highest levels since January
BREXIT decision has caused sufficient uncertainty and signs of fear to think trading lows should be right around the corner. I don't think its smart betting on a larger decline here and feel that markets should be within 1 -2 weeks max of very good trading lows that carry stocks higher into late August. However, there could be some early week minor followthrough given last Friday's decline, so wise to buy dips at 2000-3, and/or 1992-4 and looking for stabilization vs attempting to bottom-tick. But I do favor minor net long positioning for a 4-6 week basis and would use pullbacks over the next week to add.
Friday's 87 pt S&P futures decline as the 2nd largest on record, trailing only 4/14/00's 89 point move
The DJIA's 610 point loss was also the eighth largest decline ever
VIX jumped 49% last Friday, the 5th largest ever one-day move in the CBOE Volatility index
Monday and Thursday of this week could prove negative, as days following a 3% drop on Friday typically also close down (6 of 7) over last 15 years with average drop of 2.3%. In addition, Friday's that close lower than 1.5%, nearly always bring about NEGATIVE Monday's to the tune of 86 out of 90 in the last 15 years. (Ryan Detrick) Thursday, based on Stock Traders Almanac end of Quarter seasonal selling could also prove to be bearish- See below
Last week represented the third straight "down" week for SPX the longest streak since October 2014.
Sentiment is yet again reaching levels of fear -
1) Equity Put/call ratio has jumped above 1, reaching the highest levels since January.
2) The MONTHLY TOTAL PUT/CALL ratio with one trading week left is set to finish at the highestMONTHLY levels since 2011.
3) On a daily chart, there is negative divergence on the Daily Put/Call Composite as a 1.24 reading has come in LESS than the daily reading seen on 6/16 of 1.40.
4) AAII sentiment from last week BEFORE the BREXIT decision showed an inverted Spread with Bears leading bulls by 12 percentage points.
5) TRIN readings from last Friday show an ARMS index reading of 2.28, the highest since February, as extreme amount of volume flowed into Declining vs Advancing stocks, typically capitulatory
6) VIX backwardation has occurred again, which started out as a flattening out in the vol structure a couple weeks ago, but as of last Friday showed an extreme close in Spot VIX vs the Futures 1, 2, 3 months out which have inverted.
The recent bond surge has caught most off guard, and equities have followed bond yields. Now sentiment is starting to increasingly think yields stay "lower for longer" while the idea of a July or September hike has been completely taken off the table, for no other reason outside of the BREXIT uncertainty and GLOBAL yields plummeting, and not really reflective of US economic growth- Bond yields should be closer to lows, if not in the next few days, than by early July, and we're getting close to a time when its wise to bet against Treasuries, not ON them.
Seasonality ended up proving correct again for the week following June expiration, which makes it 23 of the last 26 years DOWN in the week immediately following Triple/Quad witching. However, during Election years, June tends to be the best month of the year for S&P, and 4th best for NASDAQ and DJIA going back over the last 40 years, following a poor May. End of month seasonality on the final day of the month typically is sub-par (DJIA down last 17 of 24) and S&P (Down last 6 of 10) , but otherwise, this week should be better than last week.
Currencies remain on the focus list given the surge in the US Dollar vs Euro, Yen and most importantly for some, Pound Sterling which produced its largest one-day move vs the USD. Signs of a surging USD should ultimately prove to be bearish for commodities and precious metals aren't likely to thrive if interest rates and US Dollar start to rise in unison during a time of bullish sentiment towards Gold.
Short-term Thoughts (3-5 days) : Bearish for Monday, but feel that dips should be bought at 2000-3, or 1992-4 in S&P futures and that pullbacks prove mild this week and produce meaningful lows by early July which should carry stocks higher. This week we have both Monday downside followthrough possibility along with End-of-June seasonality on the last day of the month (Thursday), which are both bearish. Yet, signs of fear are arising again while breadth remains solid.
Intermediate-term Thoughts (2-3 months): Bullish- (No change) -A move back to new high territory is expected before indices turn down to begin any larger correction. The BREXIT decision caused meaningful declines in most of the world, yet US indices failed to show much, if any structural deterioration, and the pickup in Bearish sentiment as seen by VIX move, Equity put/call spike to pessimistic levels while TRIN spiked over 2% and indices remain within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being. From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily for months. Now the BREXIT decision and plummeting interest rates have all but guaranteed that the FED will be on hold, despite any meaningful downshift in US Economic growth. The Advance/decline recently moved to new all-time highs and breadth and momentum remain on solid footing, all which suggest any decline in the near-term should be used to buy selectively, and with the start of positive sector rotation towards Technology Healthcare with any sign in yields holding and turning up being a real positive for Financials.
"Newton's Nine" - Nine stocks to consider buying after BREXIT decision that look appealing from a Technical Risk/reward perspective
Universal Display (OLED- $65.39) Excellent technical structure with a giant five-year base which was exceeded on heavy volume in late May and now has pulled back post BREXIT decision to offer more attractive opportunities to buy dips. The technical "rounding bottom" pattern from 2011-2016 following its initial run-up from 2009 makes this quite favorable to buy breakouts, and upside targets lie near $75, then $80 on an intermediate-term basis. Momentum is positively sloped , and the area from 62-65 is considered a sweet spot to buy dips in the days ahead. Stops on longs lie near $59, with upside could take OLED well up to $80. Overall, a good technical formation that supports dip-buying.
Lam Research (LRCX- $82.28) A breakout to new all-time highs happened last week which was temporarily retraced following the BREXIT decision, but this stock continues to show very good signs of technical structure, similar to the Semi space as a whole. LRCXs former highs in early 2015 followed a lengthy base and its pullback late last week makes this even more of an attractive risk/reward as this pattern likely should lead the stock higher up to $90 and then to $100 in the weeks, months ahead. While movement under $81.20 would prove to be a temporary setback for longs on a weekly close, it's unlikely to begin a lengthy correction given that this technical structure has remained intact for over a year and just recently has given way to strength.
Intuit (INTU- $105.33) INTU's breakout to new highs failed to follow-through as a result of the post-BREXIT selloff, but has not declined sufficiently to think this can't happen upon a stabilization in the market in the weeks ahead. Movement back to highs should allow for upside follow-through up to $115 and then $120. For now, the fact that last week's breakout failed doesn't take away from the broader pattern, and doesn't suggest that an initial failure won't eventually lead this back higher , and the pattern remains quite bullish technically with multiple stabs at this level in the last few weeks that eventually should prevail. Longs look right here, looking to add on any weekly close over 109 with initial targets, as suggested above, near $115.
Hasbro (HAS- $82.37) HAS' lengthy base following its breakout has pulled back to fill this open gap near $82.30, and presents an attractive opportunity to buy dips of a breakout stock which most feel has failed in recent days given the downside move. Technically momentum remains in good shape, and structurally this just gapped up to new highs in April and has consolidated for two months, helping to alleviate the overbought conditions. Consecutive daily closes back above $87 would be a reason to add to longs, expecting that $90 would be seen in short order and then $100 being an intermediate-term target.
Agilent (A-$44.12) A's lengthy base from early 2014 was exceeded back in May, and this subsequent pullback helps to relieve overbought conditions and makes this attractive to buy dips in the days ahead. The area at $42.50-$44 is a sweet-spot to add to existing longs, with upside targets found near $50 in the months ahead. This coming week should produce evidence of Agilent stabilizing right near the highs of this base, and allow for a good risk/reward technical long
Medtronic (MDT- $83.26) MDT lies just above a very attractive area to consider buying dips for intermediate-term purposes after the breakout of its one-year base which began in early 2015. MDT remains one of the more attractive stocks from a pure structural perspective within the Healthcare sector, with an ongoing uptrend, lengthy base breakout, and lack of meaningful overbought conditions. Last Friday's pullback could lead to a bit more near-term weakness, but not likely to get back under this area of the base breakout, so MDT is attractive on intermediate-term basis with any further pullback on Monday/Tuesday leading this to be attractive to buy for trading.
American Tower (AMT- $108.27) AMT's move back to new high territory in the last month is a bullish long-term development given that AMT had formed a bullish base in the last year and just managed to push back up above $105. The longer-term structure showed a positive trend of higher highs and higher lows before the recent range, and this breakout of late shows real resilience in the face of a weak market that should allow AMT to push even higher once this recent turbulence has run its course. Last week's pullback should face no further declines than down to $102-$105 before turning back higher, and structurally remains in very good shape after its push back to all-time highs.
Waters Inc (WAT- $135.53) WAT is another example of a structurally sound stock that's just in the process of trying to push back to new high territory following nearly a year of base-building. Its move in mid-June proved brief thus far in its attempts to break $137, but the subsequent weakness has failed to take away much of the positive effects of this pattern, and it remains within striking distance of new highs. Any weekly close back above $139.12 would help to jumpstart the move back higher which should help WAT get to $142, and then $150. Under $132 meanwhile would postpone the rally and allow for some additional consolidation to play out between $128-$132.
Texas Instruments (TXN- $60.54) TXN has been one of the strongest performers within the Philadelphia Semiconductors index in the last 12 months, with returns of +12.13% in the last 12 months vs a -5.74% for the SOX. Its push back up above $60 in the last month was constructive in helping TXN surpass both highs from last year, made in March and October, and should help this push up to near $75 in the weeks and months ahead. The pullback in the last couple days has taken TXN right back down to its uptrend line which should offer good support on this recent weakness to buy.
This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice. Newton Advisors, LLC has no duty or obligation to update the information contained herein. Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.
Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX. This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.